Tax Planning
How ‘No Tax on Tips’ and ‘No Tax on Overtime’ Work Under the One, Big, Beautiful Bill
New deductions under the One, Big, Beautiful Bill let tip-earners and hourly workers use Form 1-A to reduce taxable income—this article walks through eligibility, examples, and pitfalls to avoid.
By NomadicTax Research Team • 5-7 min read • March 14, 2026
## Overview
The **One, Big, Beautiful Bill Act (OBBBA)** brought sweeping tax changes effective for tax years **2025 through 2028**, including new deductions for **qualified tips** and **qualified overtime**. These apply even if you take the standard deduction. The IRS issued guidance in *Notice 2025-69* and published **Schedule 1-A and updated Form 1040 instructions** to let taxpayers claim these new deductions. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai))
## Who Qualifies
- You must report tips and/or overtime: tips through W-2, 1099, or Form 4137; overtime must be required under the **Fair Labor Standards Act** (FLSA). ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai))
- You must include a Social Security number; if married and filing jointly, both spouses must qualify. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors?utm_source=openai))
- Income phase-outs: MAGI (modified adjusted gross income) over $150,000 (single) or $300,000 (joint returns) triggers phase-out. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors?utm_source=openai))
## How Much You Can Deduct
| Deduction Type | Max for Individual | Max for Joint Filers |
|----------------|--------------------|------------------------|
| Qualified Tips | $25,000 | $25,000 |
| Qualified Overtime (portion over regular rate) | $12,500 | $25,000 |
These apply whether or not you itemize deductions. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors?utm_source=openai))
## Examples
- **Waiter with Tips**: Ann receives $18,000 tips reported on her W-2 and has MAGI below thresholds. She can deduct the full amount since it’s under the $25,000 cap. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai))
- **Highly Paid Hourly Worker**: Brad earns $200,000 in wages, $20,000 overtime. Maximum deduction for overtime is $12,500; since his MAGI is above threshold, his deduction phases out. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai))
## Transition and Penalty Relief
- For tax year 2025, existing forms (**W-2, 1099**) will *not* include separate fields for tips/overtime deductions. Instructions provide worksheets and examples. ([irs.gov](https://www.irs.gov/irb/2025-50_IRB?utm_source=openai))
- Employers/payors are given *penalty relief* if they cannot supply the separate accounting for tips or overtime. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill?utm_source=openai))
## Actionable Advice
- Keep accurate records: tip logs, pay stubs, overtime statements—even if employer doesn’t provide a separate form.
- Assess your MAGI early: estimate whether deductions will phase out and plan accordingly.
- Tax software or tax advisor: ensure they are using the new **Schedule 1-A** and updated Form 1040 instructions.
- Employers: consider voluntarily including occupation codes, overtime and tip breakdowns—even though 2025 enforcement is relaxed.
**Bottom line:** Most tipped employees and hourly wage earners will see reduced taxable income thanks to these new deductions—but they must follow rules carefully and maintain good records.